ICC Digital Library

Documentary Credit World

Documentary Credit World (DCW) - July / August 2023 Vol. 27 No.7 section - Updates

EU Maintains Capital Requirements for Performance-Related Trade Products

Further to prior reporting that the European Union Parliament was likely to preserve existing capital requirements for performance-related trade instruments (Feb 2023 DCW, p. 5), the European Parliament announced on 29 June 2023 it reached a deal with the European Council and Commission on its Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) related to implementation of Basel III standards.

The deal reportedly eschews provisions the European Commission had proposed in 2021 which would have raised the credit conversion factor (CCF) to 50% for performance-related guarantees, standby LCs, and bonds. Consequently, the CCF remains at 20% for such products.

A shift in the CCF from 20% to 50% would have had adverse cost and other deleterious effects for banks and corporate users of such products. An ICC-led campaign comprised of bankers and corporates relied on robust industry data illustrating low default rates for performance-related trade instruments contributed heavily in maintaining the 20% CCF level.